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Time to Learn From AIG's Bailout

Earlier this month, hundreds of people gathered under the gilded ceilings of the Lafayette Theatre in Suffern, N.Y., for a screening of "It's a Wonderful Life".

"There wasn't a dry eye in the audience," said one movie-goer for whom that beloved morality tale had added poignancy:
Robert Benmosche,
chief executive of
American International Group Inc.,
AIG -0.98%
owner of the Lafayette and self-styled bad boy of post-crisis Wall Street.

Since taking over at the bailed-out insurance behemoth in 2009, Mr. Benmosche has been through almost as many ups and downs as George Bailey, the haggard hero played by
James Stewart
in
Frank Capra's
gem.

Last week, Mr. Benmosche had his happy ending, thanks to the Treasury Department's sale of its last chunk of stock in AIG. After years spent battling naysayers, AIG's government paymasters, his own board and even cancer, the 68-year-old CEO was able to hail the end of the company's status as a ward of the state

American International Group chief Robert Benmosche last year at the Lafayette Theater in Suffern, N.Y
Soon Chung Lim

.

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Treasury's divestment allows the government to claim a profit of more than $22 billion since its 2008 bailout of AIG. And Mr. Benmosche can take a huge bow for achieving what was once thought impossible. At one point, even the government's accountants projected a loss of $30 billion on the AIG aid.

"We had a BHAG for the year: a 'Big Hairy Audacious Goal,'" he told me, relishing every word. "We have achieved it."

But before Mr. Benmosche, a keen runner, and his former largest shareholder complete their victory laps, it is worth considering the traumatic experience of AIG's bailout in the present context. Four years on from the crisis, large, complex financial groups are still a threat to the system.

For the government to come out in the black is better than the alternative, but good bailouts are just as frequent as free lunches.

Let's start from the beginning. My most vivid memory of the AIG rescue in September 2008 was that regulators had no idea of what to do with an insurance giant that had been sunk by reckless derivatives bets.

The Federal Reserve and Treasury were up to speed on the banks and securities houses that had gotten into trouble, but neither had ever paid much attention to AIG because it had been (under) regulated by other agencies.

The company's rescue was therefore as much trial as it was error.

It began with an $85 billion loan from the Fed and ended with a peak federal commitment of $182 billion. Taxpayers were originally promised repayment through the "fire sale of the century" and the company's liquidation, but ended up getting their money back (and more) through Mr. Benmosche's strategy of keeping AIG alive while shedding businesses, assets and people.

And instead of a meek CEO following orders, Congress and Treasury got Mr. Benmosche, who defied conventional wisdom and stood up to them with an idiosyncratic mix of profanity-laced tirades and cool business acumen.

This rushed, controversial and haphazardly executed bailout shouldn't be seen as a model rescue.

When financial historians ask what was learned from the AIG saga, the truthful answer should be: Don't do it again.

The most useful nugget from the AIG crisis may be what it tells us about what needs to be done with other financial groups.

"We massively downsized AIG and made it an easier, simpler, more easily manageable company," says
Jim Millstein,
who was Treasury's chief restructuring officer until March 2011. "We didn't downsize any of the other firms or insist on them reducing complexity."

Some, like
Citigroup Inc.
and
Bank of America Corp.
have embarked on diets of their own. As a whole, though, the financial system is more concentrated now than before the crisis.

As The Wall Street Journal reported last week, the five biggest U.S. banks have 43.7% of all U.S. deposits, up from 37.1% in 2007 and about 28% a decade ago.

The complexity of large financial groups has, if anything, increased as a result of changes in the market and a raft of often conflicting national and international regulations. And there is no sign yet of a workable plan to let a troubled institution fail without endangering the entire economy.

The fact that the U.S. reaped a handsome profit on AIG through a combination of strong-willed management, favorable markets and, yes, luck, shouldn't lull policy makers, bankers and investors into any sense of security. The reality is that if AIG, or any other company, failed today, our system would be ill-equipped to cope and unable to draw many lessons from the 2008 experience.

At the end of Mr.. Capra's movie, George Bailey finds a message from his guardian angel that reads: "No man is a failure who has friends."

In the financial world, unfortunately, you need more than deep-pocketed Washington friends to prevent failure from recurring.